The valuation is hardly exacting. Last year, the company reported pre-tax profits of £6.7m and produced EPS of 13.4p which means the historic PE ratio is 12. True, the trading performance was sharply down on the prior year when a 29 per cent decline in the gold price, coupled with greater competition, hammered gold trading profits and earnings on pledge books. But this was anticipated and importantly the company has been taking steps to both protect its profits and enhance them too.
For instance, H&T has been increasing its focus on retail as gold jewellery becomes more affordable. This is a sound move given the gold price is still down a third from its record high of three years ago and its retail business earns higher margins. Underlying retail sales grew by 50 per cent plus in the final quarter of 2013, and had raced ahead 45 per cent in the first few months of this year, albeit the first quarter of last year was an easy comparative. Moreover, expanding retail sales offers a better avenue for disposing of unclaimed pledges from customers who pawned their valuables.
It’s worth noting too that H&T’s small financial services division is launching a new flexible personal loan to replace Pay Day loans. Customers can choose a loan amount of up to £1,000, subject to affordability, and a repayment term of up to two years. The new product is supported by new in-store applications systems, central underwriting and an enhanced administration and collections system.
The planned closure of loss-making stores and a cost reduction programme make sense as does the decision not to bid for rival Albemarle & Bond after the company went into administration. That competitor has subsequently been bought out, but only two thirds of the outlets are being taken on by the new owner. The remaining 59 shops in the estate will be closed. Expect weaker rivals to go the same way which should offer H&T potential to cherry pick profitable, but cash strapped pawnbrokers to bolster its own pledge book at rock bottom prices in the future.
H&T certainly has the finances to do so because net borrowings fell by 25 per cent to £20.7m last year and now equate to only 24 per cent of shareholders funds of £88m. Broking house N+1 Singer predicts H&T will have net debt of only £13.3m by the December financial year-end which would cut gearing to nearer to 15 per cent. It also means that H&T is trading well within its £50m four-year credit facility.
Value on offer
It’s worth noting that the board declared a better than expected payout of 4.8p a share, albeit down sharply from 11.85p in 2012 when the company made EPS of 35p. The dividend will be paid on 6 June (ex-dividend of 7 May) so it’s not too late to buy now to book the payout.
The 3 per cent dividend yield aside, the shares are also being valued on only two thirds of H&T's last reported net asset value of 243p. That seems a harsh valuation given that last year could yet prove to be the nadir in the cycle. In fact, the volatile gold price is actually up 7.5 per cent so far this year and was 15 per cent ahead at the price peak in the middle of March. This offers potential for the company to surprise on the upside as the strength of the yellow metal should give a welcome boost to H&T’s gold trading and scrap distribution profits.
Currently, analyst Andrew Watson at brokerage N+1 Singer predicts H&T will report a 6 per cent decline in revenues to £93m this year to produce pre-tax profits of £5.5m and EPS of 11.6p, in advance of a recovery in 2015 when pre-tax profits of £7.1m and EPS of 14.9p are predicted. If the gold price continues its recovery then there is a fair chance these estimates will be exceeded.
I would also point out that there is hidden value on H&T’s balance sheet. That’s because inventories of £20.7m at the end of last year understate the true worth of the assets held as these stocks were accumulated largely at lower gold prices. The sharp rise in the gold price this year will have boosted the value of inventories further. Importantly, for a potential recovery play, the company’s balance sheet is rock solid as it is made up mainly of property, inventories and trade receivables.
There is undoubted value in the shares as the company’s equity is being valued at only £59m, in line with the value of its current assets less all its liabilities. That means we get all its fixed assets worth £31.5m for free including property and plant with a carrying value in the accounts of £12.3m.
In my opinion, priced on a bid offer spread of 157p to 160p, in line with my recommended buy in price in my 2014 Bargain share portfolio, H&T’s shares are well worth buying. I reaffirm my previous view that fair value closer to book value of 243p is not unreasonable especially if last year proves to be the nadir in the cycle.
Please note that I am working my way through a list of companies on my watchlist that have reported results or made announcements recently including: Pure Wafer (PUR), Eros (EROS), Inland (INL), API (API), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Pittards (PTD), Thalassa (THAL), Camkids (CAMK), Taylor Wimpey (TW.), Barratt Developments (BDEV), Bovis Homes (BVS) and Terrace Hill (THG).
■ Finally as a special offer to IC readers purchasing my book Stock Picking for Profit, the first 250 online orders placed with YPD Books and quoting offer code ‘ICOFFER’ will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge. I have published an article outlining the content: 'Secrets to successful stock picking'
